Reporting for Duty

In Europe, many CFOs say annual reports are glorified marketing brochures. If they're right, why bother with them?
Ben McLannahanJune 1, 2003

If you want to know what Ken Lever thinks about shareholder value, look no further than the annual report at Tomkins, the £3.4 billion (€4.7 billion) UK engineering conglomerate where he’s CFO.

Since joining Tomkins four years ago, he’s been pumping more and more information into the firm’s annual reports. In its report published in March, for example, the operating and financial review section provides more in-depth information than in previous years about the free cash flow, capital expenditure and return on invested capital (ROIC) of its individual business groups. It also compares the ROIC figures with Tomkins’s internal estimates of weighted average cost of capital to illustrate how well financial targets are being hit.

And just like last year, Lever has included charts showing Tomkins’s strategic positioning, while explaining the market share of key products and the percentage of sales in markets where the firm holds a number one or number two position.

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“We’ve tried to be much more transparent about the business, providing information that actually helps an investor, or a potential investor, make the economic decisions whether to invest or not,” says Lever of 2002’s 89-page annual report. To do that, “you need to be able to provide information that helps them develop an understanding of the company’s ability over time to grow sustainable cash flow, to capitalise on that potential in the marketplace,” he says. “That, to my mind, is the true indication of shareholder value.”

Paper Weights

While Lever’s convinced that nothing beats an annual report as a conduit for shareholder value, other CFOs beg to differ. Reports — at least, the paper-based ones — are often criticised as unwieldy, backward-looking documents, costing companies millions of euros to produce and post to shareholders. So it’s not surprising, that with the rise of quarterly reporting and continuous disclosure, annual reports have slid further and further down the agenda of many CFOs.

But Lever’s not on a lonely mission. Despite all the knocks, annual reports remain the primary source of corporate disclosure for the investor community. Along with face-to-face briefings, reports are an essential outlet of information, says Stefan Seip, director general of BVI, the federal investment management association in Germany, which represents around 10,000 domestic and non-domestic funds.

As he sees it, the annual report is still “a vital source when it comes to evaluating how transparent a company is, and how it feels about the future of its own business model.” With a copy of a report in their hands, he adds, investors “can weigh investment decisions with the benefit of the full picture, rather than racing through quarterly figures.”

That’s certainly something to give CFOs pause for thought as they reflect on ways to help restore investor confidence. As the OECD notes in its corporate governance guidelines: “Investor confidence and market efficiency depend on the disclosure of accurate, timely information about corporate performance. To be of value in the global capital markets, disclosed information should be clear, consistent and comparable.”

The annual report is “the core unit of comparison on a global basis,” confirms Nick Bradley, managing director and European regional practice leader of governance services at Standard & Poor’s. But, he says, for the most part, the information provided in Europe’s annual reports isn’t as clear, consistent or comparable as it could be — not just at an individual company level but also at sectoral and country-wide levels.

Granted, progress has been made, says Bradley, who completed a global transparency and disclosure study in April. Slowly but surely, he says, European reports are starting to include vital information such as the percentage of cross-ownership, the ownership structures of affiliates, audit and non-audit fees, and a full breakdown of director remuneration packages. (See table below.)

Theme of the Year

So what do this year’s batch of reports have to offer? No question, corporate governance has been “the theme of the year,” says Mike Guillaume, director of, a Brussels-based financial reporting consultancy that has compiled a global ranking of annual reports since 1997.

Responding to jittery investors and more vigilant regulators, many companies are using their annual reports to explain all manner of governance issues — from their use of accounting oversight bodies and the composition of board commit- tees to share-ownership structures and investor rights.

That certainly was the case at Novo Nordisk, the DKr25 billion (€3.4 billion) Danish healthcare firm that’s listed in New York, London and Copenhagen. CFO Jesper Brandgaard says his reporting team undertook “a pretty comprehensive effort” this year to increase their governance disclosure. The result is a new four-page section on governance in the main financial report appearing immediately after the chairman’s letter.

The 2001 report, in contrast, had a lightweight, two-page overview tucked in the back, simply listing board and executive committee members.

This year’s section explains in detail the firm’s compliance with not only the new recommendations by the Danish Nørby Committee on corporate governance, but also recent guidelines from America’s Securities and Exchange Commission (SEC) and the UK’s Combined Code. As Brandgaard explains, Novo Nordisk wanted “to make investors comfortable” with the way Danish governance structures interact with Anglo-Saxon codes.

Brandgaard also says the company decided “to do the ‘Full Monty,’” and publish the pay packages of individual executive committee members, including details of the current market value of granted share options — a bold departure from the longstanding European practice of only publishing the aggregate salaries of a firm’s most-senior executives.

Sideways Glance

But Novo Nordisk is not the only firm voluntarily shaking up the way it reports its governance. Just look at Novozymes, the DKr5.6 billion Danish enzyme producer that demerged from Novo Nordisk in 2000. Since the company was cut loose from its parent, it has carried out a series of measures to make the work of its senior management more transparent.

Among other things, this includes a new programme that analyses the interaction between its nine-member board of directors and its seven-member management team, which includes CFO Per Mansson. Together with People.DK, a Danish human resources consultancy, the firm set up a two-way evaluation process in 2002, allowing management and executive management board members to assess each other, scoring individuals on criteria such as leadership, drive and communication skills.

Such sideways assessment creates “an odd feeling,” concedes Mansson, but it’s one way of “ensuring that everyone keeps on their toes.” The process is now not only described in full under the governance section on Novozymes’ website, but also is mentioned in the latest annual report.

In addition, the report includes charts and tables providing the investor community with insight into the board’s activities. For example, one chart shows how the board spent its time over the year — on organisation and management of the business (16 percent), operational and financial reporting (29 percent), strategies such as sustainable development (33 percent), and on other areas such as acquisitions and risk management (22 percent).

On top of this, Novozymes’ report also looks to the future, spelling out areas targeted for improvement, from better risk management to more thorough pre-meeting briefings for board members.

Despite its achievements to date, Mansson insists that reporting on governance at Novozymes is a “work in progress,” adding that plans are under way to increase disclosure levels even further. But for the time being, Novozymes is “as good as it gets in Europe” in terms of transparency on governance structures, comments’s Guillaume.

Another area that features prominently in many reports is social, environmental and ethical reporting — often bundled under the loose heading, corporate social responsibility (CSR). The definition of CSR is still fluid; “responsibility,” after all, means many different things to many different people.

One of the most succinct definitions was made by author Russell Sparkes, who says in his book Socially Responsible Investment that companies are increasingly being judged not just by the products and profits they make, but by “how these profits are made.”


According to the 2003 edition of The Company Report Report, an annual guide to disclosure practices in Europe published by Prowse & Company, a UK-based financial reporting consultancy, there’s been a surge of such coverage in recent years. Prowse found that only 12 out of 100 annual reports published information about CSR practices in 1999. By 2002, the number had increased to 82.

Though companies are not yet required by regulators to provide information about their CSR practices, it’s “no longer a ‘nice-to-have’ but a vital ingredient in investor communication,” says David Phillips, head of the European ‘value reporting’ practice at PricewaterhouseCoopers (PwC) in London.

Still, some finance chiefs are privately cynical, viewing CSR initiatives as just another layer of bureaucratic meddling, encouraging more mindless ticking of boxes. That’s the wrong attitude, says Tjalling Tiemstra, CFO of Hagemeyer, the €8.3 billion Dutch distribution and logistics firm. “Investors are interested in things like customer relations, but more because of your future profit potential than anything else — they rightly see that as one of the factors influencing your ability to sustain and increase sales.”

Hagemeyer has stepped up its CSR reporting in recent years — its latest report contained details on a global performance development and measurement programme introduced in 2002, along with commentary on the company’s new code of conduct, which covers the minimum standards of socially responsible behaviour for employees.

Among the more imaginative CSR reporters is Novartis, the €32 billion Swiss pharma company. For several years the firm has been reporting in depth about its CSR initiatives.

But this year it went a step further, establishing metrics on non-financial measures. A new, two-page section in the annual report contained details on the firm’s progress towards certain health, safety and environment targets such as CO2 emissions and lost-time accident rates, and setting out its goals for the year ahead. The firm also added an animal welfare section, charting the decline since 1980 in testing on animals.

Both were audited by PwC, based on emerging best practices promoted by the Global Reporting Initiative, a US-based body working in co-operation with the United Nations’ Global Compact, and on guidelines proposed by FEE, the Brussels-based European Federation of Accountants.

“Companies ignore these matters at their peril,” says Karen Huebscher, Novartis’s global head of investor relations. “Ethical investors are no longer such a small part of the investment community.”

It’s something Brandgaard of Novo Nordisk’s is fully aware of. For him, CSR reporting is a statement of intent. “We see it as an important part of the whole story, to show that we’re attuned to non-financial risks as well,” he says. For several years, Novo Nordisk has published three separate reports — an annual review including financial highlights, the complete financial report, and a sustainability review. This year, for the first time, the firm published all three in one package.

On the Same Page

Against this backdrop, many companies in Europe are responding to investors’ calls for greater transparency by fattening up their reports. According to Guillaume of, so far, around half of this year’s crop are over 100 pages — the average last year was closer to 90.

While it’s hard to criticise any efforts to increase disclosure, a bit of prudence would be wise, says Kaevan Gazdar, head of reporting at HVB Group, the €33 billion German banking group, and author of Corporate Citizenship: Opportunity or Chore?, a new book on reporting. “A lot of companies confuse quantity with transparency — it’s easy to add a whole lot of stuff in an undisciplined way,” he says.

Are shareholders getting the information they want in their annual reports? Last October, Shelley Taylor & Associates, a London-based financial reporting consultancy, asked a group of 40 US and European institutional investors to rank in order of importance what they need to read about in annual reports.

Respondents were unanimous that reports must provide a clear snapshot of a company’s strategy. Management experience came in second place at 92 percent, followed by product information (88 percent). In a tie for fourth place — at 84 percent — were market positioning and — interestingly — bad news.

That makes the findings of Shelley Taylor’s review late last year of the voluntary disclosure practices among Global 1,000 companies all the more compelling. But while two-thirds of the 50 firms analysed used annual reports to discuss their business in the context of the global economy, less than 25 percent mentioned the associated risks. Just 44 percent of the reports described the challenges, risks and uncertainties they face, compared with 70 percent in a similar survey in 2000.

Finally, the number of firms mentioning bad news fell to 28 percent from 72 percent. “Corporate executives are failing to lead companies into the future,” says Taylor. “Most annual reports actually say very little about how they plan to get from point A to point B, or give other information required to gauge future performance.”

Taylor’s findings come as no surprise to Lever of Tomkins, who argues that too few firms take the opportunity to display mastery of their markets. These days, Lever complains, too many annual reports look like marketing brochures, with critical financial and operational data tucked away in footnotes. CFOs, he says, should not allow reports to reflect a bare minimum of information, with content driven primarily by statutory requirements and accounting conventions.

“The key point is to get as much of the information that management uses when making its decisions out there, so investors can understand it,” he says. “That way you present a balanced picture of risk and reward.” Not to mention shareholder value.